'It will be a painful time'

As the global market crisis continues to unravel, commodity prices, with the exception of gold, have deflated dramatically. The downturn, however, may bode well for consumers as food prices could begin to drop in line with goods such as maize, wheat and rice.

The outlook for South Africa’s mines, however, bar gold producers, may not be as sunny, at least in the short to medium term.
As much as R39-billion could be lost to the country through the drop annually in the platinum price alone.

The precious metal dropped to a three-year low of $928,80 an ounce on Monday, according to I-Net Bridge.

It recovered a little on Wednesday to $1 007 an ounce, but this was still far below previous highs of $2 060 per ounce in May.

Should prices drop to the $1 000 mark and remain there for a period of time, platinum revenues could be severely affected.

Last year platinum group metals (PGMs) sales amounted to R79,9-billion into the country, all of which are ultimately exported according to the Chamber of Mines.

With prices slashed, sales could be similarly damaged.

David Jollie, author of chemicals company Johnson Matthey’s annual Platinum Review, puts the drop in prices down to perceptions that the world may slip into a global recession which could affect industrial demand. He says the fall in price could also impact on production as a global economic slowdown could affect all mining sectors.

The credit crisis could affect junior miners particularly argues Jollie, as lower prices make projects looking for financing less attractive.

Meanwhile, Bloomberg reports that coal for shipment from the Richards Bay Coal Terminal (RBCT) fell to a four-month low on the back of weaker demand for the fuel. RBCT export prices dropped 8,9% to $132,80/ton, while total exports dropped 7,2% year on year, it says.

There may, however, be a silver lining to the slide in commodity stocks as the fall in grain prices could see the drop in some food items bringing welcome relief to poor consumers.

The National Agricultural Marketing Council’s (NAMC) quarterly review of food prices showed dramatic price drops in staples such as wheat, rice and maize, off the back of previous record highs.

International maize prices dropped by $25,25/ton or 8,43% from June to July, according to the NAMC.

This is, however, after large year-on-year increases in maize from $162,5/ton in May 2007 to $299,5/ton in June 2008.

Wheat prices increased “aggressively” from May 2007 to March 2008, hitting $453,75/ton. But from March to July this year prices dropped by $107,50/ ton, or 23,69%, says the NAMC.

Rice also dropped by 13,26% or $834,7/ton from May to June this year.

While concomitant declines in food prices have yet to be seen, the NAMC points out that the cost of a bag of super maize meal has declined by 2,98% year on year.

Chief economist for the Bureau of Economic Research (BER) Pieter Laubscher says that the overall decline in economic outlook means that consumers will be tightening their belts and, as a result, food commodity prices have declined.

However, he says that “we must be careful not to link the decline in commodity prices with a decline in food prices”.

This is because “demand for food is less cyclical” than the demand for other commodities and other factors such as the outlook for the rand could significantly affect prices if it continues to weaken.

In terms of other commodities such as industrial metals, Laubscher says that the “outlook is not entirely bad”.

He argues that the Asian markets have been relatively resilient to the effects of the credit crisis. While growth in countries such as China and India may decline, these enormous economies may still generate sustained demand for commodities.

“But this will be a painful time, economically speaking,” says Laubscher.

These include the decrease in demand from developed economies, (hardest hit by the financial turmoil), the difficulty for local business to source credit off-shore and the slowdown in growth for the local economy.